Trading halted, stocks canceled for company at center of fraud scheme
Written by Matthew Ward Published: 24 July 2019
Receiver in energy tax fraud case sells iconic 'solar' parcel; showcases progress in report to court
A company at the center of a massive solar energy tax fraud scheme had its near worthless stock shares canceled by order of a federal court earlier this month.
Trading in International Automated Systems, Inc. (IAUS) was halted July 8, more than a year after a federal civil trial found the company’s principals had engaged in a years-long, $50 million-plus fraud.
Numerous parcels of land in Millard County owned by the company are now in the hands of a federal receiver, with more to follow. They will soon go on the auction block.
One 75-acre parcel, site of an array of “solar” towers, scenery at the heart of the massive scheme, was sold inside the 4th District Court in Fillmore last Thursday for $21,000.
The U.S. District of Utah Court authorized the auction of two more parcels last week, a 40-acre property appraised at $8,000 and an 80-acre parcel valued at $24,000.
Other properties awaiting court approved-sales include a 120-acre parcel valued at $48,000 and a 320-acre parcel appraised at $128,000.
R. Wayne Klein, the court-appointed receiver, is selling multiple properties and is engaged in a furious effort to claw back ill-gotten gains and financial assets related to International Automated Systems, RaPower-3, LLC, and 14 other related business entities owned and operated by Neldon Johnson and other key figures—longtime business associates and family members alike.
Even people and businesses on the periphery of the fraud scheme are likely to see a tsunami of legal actions in the near future as the receiver ramps up efforts to secure monies due the federal treasury.
The efforts and people likely affected are spelled out in great detail in the receiver’s most recent progress report, filed with the Utah federal court last week.
With every court filing, new details emerge, painting an ever clearer picture of the grand scheme’s anatomy, the people who most benefited as well as an assortment of eyebrow-raising tidbits.
History with state, SEC
According to Klein’s most recent quarterly report to the court, International Automated Systems was sanctioned not once, but twice by state authorities and yet continued to operate for decades.
In 1989 the Utah Division of Securities found IAUS was selling securities improperly. The company was ordered to pay a penalty and a rescission—a canceling of transactions for a set period of time. In 1991, when IAUS applied with the state for a trading exemption, its application was denied and again the division assessed a penalty.
“The Receiver believes neither penalty was paid,” Klein reported to the court.
Yet, IAUS was in the business of selling shares for years to come—prices ranging from more than $50 a share in the 1990s to a single penny just last year.
The stock was trading at 4 cents a share when trading was finally halted.
According to the court order canceling all of IAUS’ shares, the company was scrutinized by the federal government, too. It was sanctioned twice by the Securities and Exchange Commission, in 2004 and again in 2005.
The SEC placed injunctions against company owner Neldon Johnson and some of his family members in 2005 over allegations of stock price manipulation.
In the company’s most recent annual report—last filed in June 2016, and filed late annually and quarterly as much as 39 times through the years—Johnson failed to disclose the SEC injunctions and his own 2011 personal bankruptcy to investors.
As if that wasn’t enough, the court order shows the intellectual property supposedly underpinning the “technology” owned by IAUS was actually owned by foreign entities.
Company made no profit, sold no product
None of this seems to have stopped Johnson and his cohorts from continuing their fraud.
“Despite the public availability of the Amended and Restated Judgment in a Civil Case, the Findings of Fact and Conclusions of Law, and the Receiver’s filing of Form 8-K disclosing the Memorandum Decision and Order Freezing Assets and the Receivership Order—IAS’s stock has retained value and continued trading,” the court order states. “IAS has never had a product that generated revenue, has never generated a profit, and had no market share for any of its products.”
What IAUS was, according to receiver Klein, was a piggy bank for Johnson and his family and assorted business associates.
In June 2018, about the same time Johnson and his companies were found to have been engaged in the solar energy fraud, more than $2.5 million was paid out by IAUS to family members, including wife Glenda Johnson and family members Randale Johnson and LaGrand Johnson. The bulk of those funds went to a business associate named Robert Johnson, no relation to Neldon Johnson, according to the court records.
The receiver also discovered that a former employee of IAUS, Lisa Phillips, was “found to have embezzled over $200,000.” Criminal charges were never brought because the woman and her husband, Blain Phillips, agreed to repay the stolen money. A promissory note was signed and two properties were put up as security on the note.
“Despite this, Johnson retained Blain Phillips as a director of IAS. Johnson also allowed Blain Phillips financial credit against the repayment obligation for Blain Phillips’ continued service on the board of directors. Consequently, no payments were made by the Phillips on the note,” the receiver reported to the court.
One of the properties securing the promissory note was also sold in violation of the agreement with no repercussions.
The receiver has subsequently sent the couple a demand letter for repayment.
In another tidbit unearthed by the receiver, Neldon Johnson’s ex-wife, Ina Newman, may also be on the hook for a substantial amount of money.
As part of a divorce settlement in March 2013, Neldon Johnson conveyed an interest to a property in Salem, Utah to his former wife, with IAUS releasing a $650,000 lien on the property. Newman was also given $50,000 cash.
“The Receiver believes these were fraudulent transfers that benefited Newman and Johnson, not IAS, and has demanded a return of these funds from Newman,” the receiver’s report states. “Newman disputes that the release of the lien and the cash payment were fraudulent transfers. The Receiver expects litigation will be necessary to recover these funds.”
Law firms on notice, rough litigation ahead
Numerous law firms are also in the receiver’s crosshairs, including one that accepted millions of shares in IAUS stock in lieu of payment for legal services, past and future.
Klein says he has requested invoices for legal work done in an effort to determine whether the work was contracted in the reasonable course of business or whether it was for Neldon Johnson’s personal benefit and that of his associates or “investors.”
Klein told the court he doesn’t expect this line of litigation to be an easy one.
“The Receiver has made demands on multiple law firms for the return of payments they received where the legal services were for the benefit of persons other than the Receivership Entities. The Receiver expects to file lawsuits seeking the return of these funds. He expects the litigation will be contentious,” the receiver’s most recent report to the court states.
Law firm Nelson Snuffer Dahle & Poulsen, with offices in Sandy, is repeatedly named as being the beneficiary of Neldon Johnson’s legal work largess.
In June 2018 alone, the firm received $1.17 million in legal fees from Neldon Johnson-owned business entities.
Previous to that the firm was given 9 million shares of IAUS stock. Five million of those shares were sold between 2009 and 2012 for $1.2 million. The proceeds were supposedly used for legal fees and to pay other law firms for services rendered.
This arrangement—of paying legal fees with IAUS stock—was well underway before 2009, Klein told the court.
“Documents delivered to the Receiver by Defendants on May 10, 2019 indicated that Nelson Snuffer also received and sold stock prior to 2009. Minutes of meetings of the IAS board of directors (which were among the documents delivered to the Receiver) indicated that the board approved issuing over 16 million shares of IAS stock to Nelson Snuffer between 2000 and 2011,” the receiver’s report states.
The law firm relinquished certificates worth 3.5 million shares of unsold IAUS stock in March, according to a footnote in the receiver’s report to the court.
Klein contends that, “The process of IAS issuing enormous blocks of stock to Nelson Snuffer had the effect of Neldon Johnson and other Receivership Defendants being able to consume prodigious amounts of legal services without incurring any costs for those services.”
Insiders cashed in on piggy bank stock trades
A financial services company called Pacific Stock Transfer Company, with an office in Las Vegas, was held in contempt by the federal court earlier this year for failure to comply with a subpoena for records as well as for violation of a court order.
The company eventually turned over a number of records hoping to purge its contempt—though the court ordered it to pay the receiver’s legal fees as a result of its delayed compliance.
According to Klein, the records from Pacific Stock Transfer, though still incomplete, did provide an insider’s glimpse into the holding of IAUS shares and trading of those shares. According to the records, 1,007 shareholders possess stock in IAUS, with 177,281,344 shares outstanding.
Insiders identified by Pacific Stock Transfer have sold about 213 million shares, though when these stock sales took place is not yet evident. Insiders, according to Klein, currently hold 35 million shares, or about 20 percent of the outstanding shares total.
Neldon Johnson, if Klein’s accounting is correct, has sold as many as 84 million shares since at least 1996. Law firm Nelson Snuffer may have sold as many as 90 million shares since 2000.
Klein hopes to get a better idea of how much these insiders benefited from the stock sales in order to also go after any funds generated after the federal government filed its civil lawsuit against RaPower-3 and affiliated companies.
“At the point when the Receiver later obtains information showing the prices at which these insiders sold their shares, the Receiver will be able to estimate better the proceeds the insiders received from these sales,” Klein’s report states.
If the insiders sold their 213 million shares at the low, low price of 4 cents a share, then proceeds would amount to only $8.5 million. However, if those shares sold when the price was at least a dollar, then insiders could have gained as much as $213 million.
“While it is not yet known at what price all these shares were sold, the volume of shares sold does indicate that sales of securities were a significant income source for all of these insiders,” Klein reported to the court.
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